Benchmarking: Eight Lessons for High Performance

As outlined in the first part, a benchmarking methodology was defined so that the project team could approach the task of recommending improvements to the client with a set of specific objectives. A database of information from more than 1,000 facilities was created. Then six facilities, determined to be Best-in-Class by the rating criteria established, were visited by the team to observe management practices and performance. Subsequently, the conclusions reached from the visits and from reviews of the database, were used to develop a set of performance-improvement guidelines.

Resource Management

Unaccounted for water (UFW) represents the difference between water supplied and treated, and water consumed, or net water loss. It is used by the United Nations Organization as the primary indicator of a water supply facility's efficiency. As a group, investor-owned water utilities out-perform publicly-owned systems in limiting water loss, although the best public system performer outperforms the best performer in the investor group (Fig. 1). This is significant as the public firms are generally much larger than private entities.

Also -- contrary to conventional wisdom -- the data demonstrate that larger organizations tend to be more efficient. In both public and private utilities, the high performer was two and three times as large as the mean example. The mean production for investor-owned water utilities was 120 million gallons per day (mgd), while the high performer's average was 235 mgd. By contrast, the mean figure for publicly-owned systems was 549 mgd, and the high performer's average production was 1,582 mgd.

Size and water system complexity, therefore, are not impediments to high performance. These results indicate also that high efficiency can be achieved despite the cultural and structural differences between public and private utilities.

Productivity

Sales per employee is a good measure of productivity. Both mean system and high performer results indicate that investor-owned systems are more productive than public systems (Fig. 2). But high performers show productivity levels well over the mean in all segments, suggesting that significant improvement is possible for the entire industry.

Pricing, however, could affect these results. To remove price distortions, we also measured productivity in terms of customers per employee. Investor-owned systems, on average, are more productive than public systems on this basis (Fig. 3).

High performing groups are more productive than the mean in all segments, indicating that significant improvement is possible across the industry. Also interesting is that mean productivity is higher among private utilities, even though the largest U.S. water and wastewater systems are public. One explanation for this is that private systems, in general, have done a better job of automating operations.

Quality

Regulatory compliance at wastewater facilities varies widely across the country for the period studied. The best performance in this category would obviously be full compliance, or no violations. Given our client's difficulties with regulators, however, it was more helpful to illustrate the organization's position relative to other poor performers, rather than catalog all entities with few violations. These "reverse" results are shown in Figure 4.

The challenges of meeting increasingly stringent regulations, of course, affect all water utilities. Managers must recognize that this will require increased investment, and plan appropriately. Failing to do so will result in fines, consent orders, and facility shut-downs. More serious problems can affect public health and long term performance.

Financial Management

One of the clearest indicators of high performance is net income (or operating surplus in the case of public systems). The study revealed that investor-owned units are more profitable, on average, than publicly-owned facilities (Fig. 5).

A myriad of factors affect profitability, and the data here indicate that size is significant -- the most profitable firms tend to be smaller. However, high performers in both private and public sectors show substantially higher performance against the mean, suggesting much room for improvement through professional management practices.

In each of these performance categories, our client was considerably off the mark. The mean and high-performer statistics provided a framework for setting performance improvement goals. If you measure your own organization's performance in these areas, we recommend you identify an appropriate peer group, and compare performance to that group over several years. The trends offer insight to your position in the industry, and what strategies may be appropriate for improving performance.

Eight Lessons for High Performance

The visits to the high performing facilities across the country allowed the project team to compile a set of guidelines as a starting point. We explored "best practices" in functional areas and managerial systems. Not surprisingly, some key themes emerged, shared by almost all of the industry leaders. We call them "Eight Lessons for High Performance."

Act like a private company.
Regardless of whether the utilities were publicly- or investor-owned, the best operate as if they are private businesses. They strive to build a sense of ownership and accountability among all employees with aggressive total quality programs. They initiate rigorous streamlining procedures to improve efficiency. Most critically, they place strong emphasis on customer service, regularly tracking customer satisfaction, and even linking customer service performance to management appraisals.

At Philadelphia Suburban Water Company, for example, a troubleshooting repair team responds to high-consumption alerts, proactively visiting customers whose records show suddenly escalating withdrawals to determine if there are leaks or meter problems. At Des Moines Water Works, the quality and reputation of the staff is so impressive that clients actually pay personnel at the utility for consulting services. Like a private company, the Los Angeles County Sanitation District seeks opportunities where it can add value, and has diversified into a number of related and complementary businesses, including landfills and waste-to-energy facilities.

Increase rates to cover costs.
Successful utilities set rates to reflect operating costs plus a portion of longer-term investment needs. They increase rates in regular increments, rather than pushing for large rate increases sporadically. Further, successful entities invest in public relations to sensitize customers to ongoing capital requirements, particularly for regulatory compliance and quality improvement. As a rule, customers are willing to pay more for good service.

Invest in conservation/reclamation programs.
Many utilities appear to be in a vicious spiral: customers view water as a commodity and are unwilling to pay higher prices; services decline as costs increase and funding goes down; resistance develops to price increases for declining services. We believe that the entire water and wastewater industry could benefit from an institutional advertising campaign that stresses the value of clean water conservation.

Successful utilities, such as Des Moines, recognize that water is a scarce resource, and educate consumers about the value of water through proactive public relations campaigns. A key first step in instilling awareness about conservation is to develop total coverage for metering. In Los Angeles County, for example, metering clauses are built into the local laws. All new houses must contain meters, and new owners of old houses must install meters when they occupy. Other successful utilities actively encourage reclamation for commercial and industrial customers. As part of their well-developed sludge management program, Los Angeles County sells sludge for composting -- an additional source of revenue and cost-recovery.

Invest in technology.
While this appears obvious, too many systems put off investing in technological improvements, such as automation, telemetering, and advanced management information systems. The winners don't procrastinate.

Create an active partnership with the Board and the customers.
In successful utilities, the Board of Directors sets policy and strategy, and measures performance. Board members meet and work regularly with senior management, collaborating to improve the system. At Des Moines Water Works task force subcommittees composed of board members and managers tackle internal and external issues, including development of a five year strategic plan and a long-range water resource plan.

Customers are invited regularly to preview plans and to learn about operational and regulatory challenges at winning utilities like Des Moines and Philadelphia Suburban. Proactive participation like this smooths the way for future actions. Leading utilities measure their performance in satisfying customers through independent surveys.

Empower employees.
This is practically an axiom for well-run companies in any industry today. Empowered employees have a stake in the performance of the organization, and often recommend improvements. An empowered organization pushes authority and decision-making downward, encouraging and rewarding innovation. East Bay Municipal Utility District in Oakland, California, recently streamlined its organization, cutting out a layer of management to simplify operations and improve communication. At Des Moines, cross-functional teams tackle common problems, and actively participate in the strategic planning process.

Nurture regulatory relations.
Anticipating ever stiffening federal and state regulations, successful water and wastewater organizations invest significant time and effort in nurturing relations with regulators. Cooperation must be built upon a foundation of trust, and proaction is the operative term. At East Bay MUD, for example, senior managers hold an off-site retreat with state regulators to plan for the upcoming year together. Regulators are likely to scrutinize an operation in depth if the staff demonstrates a poor compliance attitude, and an unwillingness to implement realistic improvement plans. Winning organizations track their regulatory performance to measure their effectiveness.

Invest in strategy development.
Every high performing utility studied has invested in developing a practical strategic planning program. The organization has formulated a clear vision of where it wants to go. Key managers jointly select strategies and programs for the organization, and provide the leadership and commitment necessary for implementation. Specific performance measures are developed to track progress, and the strategic plan itself is openly shared with all stakeholders. East Bay MUD has one of the most sophisticated programs in place, with a set of detailed performance parameters for each functional area (operations, customer service, maintenance, etc.). The strategic plan is not a capital improvement plan or a budget document -- it is a dynamic and practical tool that managers use regularly to prioritize activities and improve performance.

As these lessons suggest, utilities can gather important information about how to improve organization and performance. These findings have made it clear that most high-performing operations are eager to share their experiences and wisdom.

About the Authors:
R. Paul Allio is vice president of corporate planning at Nicholson Construction Company, Pittsburgh, Pennsylvania. Michael K. Allio is with Robert J. Allio & Associates, Inc., of New York and Atlanta, where he is a senior associate specializing in business strategy and implementation.